Effective Forex Trading Strategies
- Trend Trading
Trend trading is one among the most reliable and simple forex trading strategies. because the name suggests, this sort of strategy involves trading in the direction of the current price trend. so as to do so effectively, traders must first identify the overarching trend direction, duration, and strength. All of those factors will tell them how strong the current trend is and when the market may be primed for reversal. during a trend trading strategy, the trader doesn’t have to know the exact direction or timing of the reversal; they simply need to know when to exit their current position to lock in profits and limit losses.
Even when a market is trending, there are sure to be small price fluctuations that go against the prevailing trend direction. For this reason, trend trading favors a long-term approach referred to as position trading. When investing within the direction of a strong trend, a trader should be prepared to face up to small losses with the knowledge that their profits will ultimately surpass losses as long as the overarching trend is sustained. For obvious reasons, trend traders favor trending markets or people who swing between overbought and oversold thresholds with relative predictability.
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Tools Used
To determine the direction and strength of the current trend, traders often depend on simple moving averages and exponential moving averages such as the moving average convergence/divergence (MACD) and average directional index (ADX). All moving averages are lagging indicators that use past price movement to lend context to current market conditions. additionally to providing insight into the current trend direction and strength, moving averages also can be used to gauge support and resistance levels. When price fails to succeed in anticipated support and resistance levels, or when a long-term moving average crosses over a short-term moving average, it’s thought to signal a reversal. instead of anticipating the direction of the reversal and entering into a new position, trend traders will use these signals to exit their current position. Once the new trend has manifested, the trader will once more trade in the direction of the current trend.
Price momentum will often change before a price change occurs, so momentum indicators, like the stochastic oscillator and relative strength index (RSI), also can be used to help identify exit points. These indicators help traders identify when price is approaching overbought or oversold levels and supply insight into when a change will occur.
Pros and Cons
Trend trading doesn’t require traders to understand what will happen next—only to understand what is happening right now. As such, it tends to be a more reliable and consistent strategy. To trade effectively, however, it’s important to verify the direction and strength of a new trend before entering into a position. Although you'll not be the first one to enter the trade, being patient will ultimately shield you from unnecessary risk.
Forex trading strategies are available all different shapes and sizes, so before you jump into any of them, we highly recommend you test-drive them first.
- Position Trading
Position trading may be a strategy in which traders hold their position over an extended time period—anywhere from a couple of weeks to a couple of years. As a long-term trading strategy, this approach requires traders to require a macro view of the market and sustain smaller market fluctuations that counter their position.
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Tools Used
Position traders typically use a trend-following strategy. They depend on analytical data (typically slow moving averages) to identify trending markets and determine ideal entry and exit points therein. They also conduct a fundamental analysis to spot micro- and macroeconomic conditions that may influence the market and value of the asset in question.
Pros and Cons
The success or failure of position trading hinges on the trader’s understanding of the market in question and their ability to manage risk. To lock in profits at regular intervals (and thereby mitigate potential losses), some position traders prefer to use a target trading